What lies ahead?

10 January 2005 00:01  [Source: ICB]

Last year saw the chemical industry’s fortunes improve. ECN assesses what 2005 has in store for the agrochemicals, petrochemicals, chlor-alkali and biotechnology sectors

Agrochemicals

Cath O’Driscoll

Interest in the world’s best-selling agrochemical pesticide, the weedkiller glyphosate, shows no sign of abating. In 2002, sales for agrochemical uses were around $3bn (plus $1.7bn for non-crop applications), according to Agranova. This is a rise of 30% since 2000, mainly driven by the growth in demand for controlling weeds in glyphosate-resistant genetically modified crops.

Some way behind in second place, with sales of $920m in 2002, is the insecticide imidacloprid, which saw sales soar 140% over the same period. This beat fungicide azoxystrobin, which saw an impressive 50% gain on 2000 sales to $472m in 2002, taking it into third place.

Such healthy increases in demand are not reflective of the sector as a whole. Even after taking into account the fall in value of the US dollar, the ‘market for agrochemicals has been pretty stagnant or slightly contracting,’ says Maris Bite, a consultant with Agranova. Worldwide end-user sales of agrochemicals in 2003 reached $29.390bn, up from $27.79bn in 2002 and down slightly on the record high of $31.25bn in 1998.

Latin American and Far Eastern markets have returned the greatest growth rates and North American and European markets the least, as measured in US dollars. In 2003, North America accounted for 28.5% of the total (30.1% in 2002), the Far East, 26.0% (25.7%), western Europe, 23.8% (22.7%), Latin America, 12.3% (12.2%) and the rest of the world, the remaining 9.4% (9.3%). Early indications are that 2004 will have seen considerable positive growth in the market, largely as a result of the economic recovery in Latin America (and also fuelled by the soybean rust outbreak in Brazil), drought recovery in northern Europe and good growing conditions in North America.

The strongest future growth in sales will be in India, which will rise by 2.5%/year to realise $645m of sales by 2008, predicts Agranova. China and Columbia are also set to see growth of 2%/year and 1.5%/year, respectively, in sharp contrast with Japan, the world’s second-largest market for agrochemicals, where Agranova forecasts sales will fall 1.5%/year, to $2.73bn by 2008. Markets elsewhere are likely to remain fairly stationary, with US sales expected to be $7.16bn in 2008.

But while the overall value of the market is unlikely to change, Bite acknowledges, ‘the proportion of the value will gradually be taken over by newer, safer, more effective pesticides – the large percentage increases in market value are being taken by these new types of active ingredient’.

Most of these newer pesticides are more target-specific than the older, more toxic, ‘kill-all’ type pesticides, many of which are still widely used, especially in undeveloped countries, despite regulatory pressure to eliminate use of any pesticides having high mammalian toxicity and/or long-term residual action.

The sales split between the various types of pesticide – herbicides, insecticides and fungicides as well as other biologicals, fumigants and pheromones etc – is likely remain fairly constant in the short term, Bite says, ‘with the secondary effects of climatic change assisting the development of a larger market share by insecticides and fungicides – due to pest population increases in the northern hemisphere’.

Fuelled as well by continued loss of market share to generics, R&D activity in the agrochemicals sector continues to flourish. The industry monitor for new activity, Agranova’s annually published Ag Chem New Compound Review, has consistently reported 75-100 new actives/year during the period 2000-04. Of these, over 60% are chemical entities, the rest being biologicals, which tend to have small, local, niche markets.

Beating the pests

Emerging compounds include Bayer’s tetronic acid compounds spirodiclofen and spiromesifen, and the fungicide prothioconazole. All are now in the early stage of commercialisation and possess novel modes of action effective against pests that have acquired resistance to currently used pesticides. Their expected success is likely to help Bayer CropScience maintain its number one ranking as the world’s leading agrochemicals company. It is to see sales of $6.27bn by 2008, Agranova forecasts.

‘However, exciting developments from the financial view are highly unlikely - the amount being spent by the end-user, the farmers, is expected to remain relatively constant,’ Bite says: ‘Industry consolidation by merger has pretty much levelled off – there is not much scope for improvements in efficiency there; so, it’s back to the laboratory – the discovery and implementation of new pesticidal activity’. -

Chlor-alkali

Simon Robinson

The chlor-alkali industry is entering uncharted territory. Pricing mechanisms and cost structures are in a state of flux and there are questionmarks over how the markets will develop in the US and China.

On top of this the market is also facing a capacity crunch, says London’s Harriman Chemsult in a recent report, World Chlorine and Caustic Soda 2004. Capacity is likely to be tight in 2005 and into 2006 because market growth has caught up with capacity and the time it takes to build plants. Prices are likely to be robust through this period and it could be a challenging time for consumers.

In 2004, world chlorine production looks likely to have been over 47m tonne and caustic soda production around 51m tonne. The global chlorine-caustic soda output ratio is therefore around 1:1.07 and gross world electrochemical unit (ECU) output is just over 98m tonne/year. By 2007, chlorine production will reach 52m tonne/year, caustic soda will be 55m tonne/year and world ECU output almost 107m tonne, Harriman Chemsult predicts.

In 2004, global chlorine capacity was over 53m tonne/year and operating rates averaged almost 89%, but spare capacity was not well matched with demand. It is tight in North America and western Europe following many years of under-investment in new capacity because of poor margins. Demand has now caught up with supply, tightening the market and raising operating rates.

From late 2006, the first effects of new capacity will begin to be felt, moving chlor-alkali pricing past its peak and into its next down cycle. The current price cycle will therefore be shorter than the historical norm thanks to the supply situation. The subsequent trough will be less deep than usual because of the fundamental supply-demand balance. Additionally, new capacity is being built to take account of both sides of the production equation, on an ECU basis, rather than looking at one molecule.

Much new capacity will be built in Asia, which is seeing high demand for chlorinated derivatives and caustic soda, or the Middle East, due to low production costs. China will continue its capacity increases, but there are questions over sustainability. These centre on the potential to expand Chinese caustic soda exports, possible shortages of salt and power and new finance directives.

Harriman Chemsult expects not all of the currently announced chlor-alkali projects will proceed as planned, but the increase in Chinese capacity will be by far the world’s largest. Although the pace may slacken, China will continue to see strong medium-term chlor-alkali capacity growth. In the Middle East, a number of major projects are set to open before the end of this decade, including in Bahrain, Iran and Qatar.

Relatively little new capacity will be built in Europe, where industry is wrestling with phasing out the mercury process, and Harriman Chemsult expects a significant net reduction in European capacity to 2012. In North America, the main issue surrounds production economics. The increase in natural gas prices, together with higher environmental and labour costs in the US, means that the US Gulf is no longer a region of low production costs and this has been an extra deterrent to investment. However, it has not stopped Shin-Etsu from announcing a $1bn integrated chlor-alkali to PVC complex there.

The main growth markets will tend to be on the caustic soda side of the industry, which raises the question of which will drive the market in the future: chlorine or caustic soda? Traditionally, chlorine sets operating rates, but there is the potential for a shift in emphasis over the medium term. The main caustic soda growth markets include alumina – in Australia and Latin America, paper pulp, especially Latin America, and other parts of the chemicals sector. -

Petrochemicals

Michael Gordon

European petrochemical producers have felt the pinch in the face of global competition – particularly from the Middle and Far East – for a number of years and 2005 will be no exception. China continues to expand production at an unprecedented rate, followed closely by Iran, Saudi Arabia and Qatar and other parts of the Middle East. For European producers, the good news is that domestic demand remains high and anti-dumping duties and high transportation costs for producers further afield mean this is likely to continue.

‘On a global scale, western Europe has 21% of world ethylene capacity and about 25% if you include the former east Europe,’ says Andrew Pettman, CMAI’s director for Europe & Middle East Olefins Studies.

Ten new countries from central and eastern Europe (CEE) joined the EU in 2004. For Western producers, eastern Europe represents a new market as well as a good base for sales and distribution to the Far East. For local producers, it represents a chance to broaden markets and form strategic alliances with major western producers.

Many refining companies in CEE, such as PKN Orlen and Mol, are now experiencing overcapacity, and are keen to grow their business through acquisition or diversification, which is fuelling their interest in petrochemical production. Last year analysts predicted a rash of Western producers looking to eastern Europe as a means of competing against the tidal wave of competitively priced material coming from the Middle East. However, there was little evidence of this throughout the year.

CEE and west European producers face the same threats, but producers in western Europe have well established and modern production facilities, whereas CEE producers are in dire need of modernisation. This may be why investment in the region has been slow, but as these countries become more established and accustomed to their EU status, this is sure to accelerate.

Growth in the European petrochemical market is expected to be slightly above GDP. However, it is likely that growth will be faster in central rather than in western Europe. ‘That said you have to remember that at the ethylene level growth will be lower since the underlying demand will not just be met by increasing production but by increasing imports,’ adds Pettman.

Imports on the increase

As a continent Europe largely caters to domestic demand with domestic production, although the level of imports is set to rise. Europe now imports around 1m tonne/year of ethylene equivalents, which is about 4% of our requirements. According to Pettman this will double by the end of the decade. There are no approved plans for new crackers in Europe, due to the high cost of development, so the level of imports will continue to rise.

According to Pettman, there is no one set of leaders in Europe. Some oil companies, like BP, ENI and Shell, seem to be moving away from petrochemicals, while companies such as Mol and Repsol are continuing to grow, and yet others, like ExxonMobil and Total, appear to be happy with their assets in Europe.

The main export markets for European producers are Turkey and north Africa, but with Turkey applying for EU membership and planning several major expansions in its domestic production, it may take a smaller share in the future. However, there is no immediate threat as Turkey’s accession is likely to take 10 years or more.

Plenty of restructuring, consolidation and mergers are already on the cards in Europe, with BP Newco, Lanxess, and Total all recently announcing plans to sell off assets. More restructuring is likely in the year ahead, as producers in the West come under increasing trading pressures from the East and Far East. ‘There seems to be a continuous process of change if I think back over the last 18 years of my involvement in the industry,’ says Pettman.

However, there is no one nation that poses a big threat to European production. There are concerns about polyethylene and glycol volumes coming to Europe from the Middle East since in a high crude world these volumes are comparatively very low cost. Other base chemical chains, such as propylene, benzene, butadiene or even xylenes are of less concern since the Middle East does not have such substantial cost advantages in these areas. So a significant market still remains for producers in Europe.

Pettman argues that to guarantee a secure future Europe must seek ways to meet its demand in derivative areas where it is competitive. A good example is the huge investment under way in polyethylene in Wilton, Teesside, UK, by Huntsman.

According to Cefic, the strongest chemical performance next year will be in petrochemicals. In 2004 petrochemical production grew in Europe by 2.8%, but Cefic is predicting 3.6% growth in 2005. In global terms this is still very modest.

So for 2005 there are promising signs of improvement in petrochemical fortunes, but it won’t be a year for celebrating. -

Biotechnology

Glenda Thisdell

For the biotechnology industry, 2005 will be a white year. There are three types of biotechnology, which the industry labels ‘green’, ‘red’ and ‘white’. Green biotechnology is genetically modified (GM) crops, the red area is healthcare applications while white biotechnology covers all other areas. Biotechnology uses enhanced microorganisms to boost industrial processes and products such as feed additives, bio-plastics, biofuels, detergents, enzymes and vitamins. White biotechnology is an emerging sector, though the underlying processes have been in use for thousands of years, for example in making wine, bread and cheese.

According to Adeline Farrelly, communication manager at EuropaBio, the European Association for Bioindustries, there are big developments in white biotechnology, and they are gaining much wider public acceptance in Europe. ‘This is the technology that ‘crosses the bridge’. You don’t expect the public perception problems you have with red and green biotechnology,’ she said. ‘This is an area with huge potential but it needs to be developed.’

From the industry’s perspective, 2005 will be an important year for the application of white biotechnology. There are great hopes both for increased public acceptance of the benefits that can come from this science, and also for a real boost from Brussels and national governments.

To get the biotechnology message to the public, EuropaBio has developed a biotech sample bag. The bag contains a snack bar made with biotech ingredients, a GM cotton t-shirt and a bio-plastic cup. ‘to put people into contact with real things’, says Farrelly.

White biotech has good credentials no one can ignore, she says; the technology can have good environmental benefits and also good economic benefits. But to produce industrial quantities companies are going to have to change production systems, and that needs investment, she adds.

One of the challenges will be to get governments to look at what they can do to boost the development of biotechnology companies in their region, she says. The challenge is to look at the financial environment and see what can be done for companies that rely on a lot of research money to get a product off the ground.

France, she says, has used an encouraging approach in giving young, innovative companies a special status. The 4 or 5% of small-to-medium-sized enterprises with the highest growth potential need massive amounts of research money. In France, since December 2003, companies up to eight years old with high research spending have been eligible for tax-free status, benefiting employees and investors. This is a model many other countries are looking at.

At the European Union level, EuropaBio believes there is much that can be done to encourage investment in research, and also to ensure that member states properly implement relevant regulations. So far, says Farrelly, green biotech in the form of GM crops, has been resisted by countries including Germany despite EU law allowing GM crops to be grown.

But the new European Commission, which took office in November, has clearly stated its determination to follow through the so-called Lisbon agenda, designed to make Europe the world’s most competitive economy by 2010. As Farrelly puts it, this year we will get to know the new political environment: ‘Are they going to be serious about the Lisbon agenda or just pay lip service to it? The Lisbon agenda is about innovation and biotech accounts for a huge chunk of innovation.’’-

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